CHAPTER 1
MULTINATIONAL FINANCIAL MANAGEMENT:
OPPORTUNITIES AND CHALLENGES
1. Globalization Risks for MNEs. Was globalization responsible for the slowdown of
MNE business during the financial crisis of 2008?
In today’s global economy, the process that integrates world trade, links financial
markets, and propels cross-border capital flows is called financial globalization. In
our globalized world, €4–5 trillion in foreign exchange transactions are made daily,
and around €20 trillion of goods and services are traded globally. As much as
financial globalization has produced many opportunities for MNEs, it has also
in risky assets.
2. MNEs and Operation in Global Markets. What are the factors that affect the
decisions of multinational enterprises to operate in global markets?
The main determining factor for operating in a new market is the comparative
3. Eurocurrencies and Eurocurrency Markets. What are the major eurocurrencies?
What is meant by a Eurocurrency market?
4. Fragility of the Global Financial Marketplace. How has the global financial crisis
exposed the fragility of assets and institutions of the global system?
In the interlocked financial global system, the fragility of assets and institutions led to
5. MNEs and LIBOR. Most MNEs either take loans in eurocurrencies or issue
eurobonds with a floating coupon rate tied to the LIBOR. Explain how MNEs were
affected by the LIBOR scandal.
A few large banks were fined and penalized for rigging the benchmark LIBOR rate.
While large banks borrowed funds (as was the case during the global financial crisis),
they made their quotes below the fair market rate. Regulators often assumed that
those holding their bonds.
6. Post-LIBOR Scandal. Why do you think the UK government has resolved against
the total elimination of LIBOR benchmarks after the scandal?
The London Interbank Offered Rate (LIBOR) is widely used as a benchmark interest
rate for hundreds of billions of dollars in financial contracts, corporate loans, and
adjustable rate home mortgages and consumer loans. In 2012, the LIBOR scandal was
exposed, revealing collusion between and inaccurate interest rate quotes by a dozen
large British banks, some of which fraudulently reported their short-term borrowing
costs so as to profit from deals. Following the LIBOR scandal, many have called for
the total elimination of LIBOR. However, as it remains the one and only pervasive
interest rate benchmark, the British government decided against abandoning it and
7. Limitations of Comparative Advantage. The key to understanding most
theories is what they say and what they don’t. Name four or five key limitations to
the theory of comparative advantage.
Although international trade might have approached the comparative advantage
model during the nineteenth century, it certainly does not today, for the following
reasons:
• At least two of the factors of production, capital and technology, now flow
directly and easily between countries, rather than only indirectly through traded
goods and services. This direct flow occurs between related subsidiaries and
affiliates of multinational firms, as well as between unrelated firms via loans and
license and management contracts. Even labor flows between countries, such as
immigrants into the United States (legal and illegal), immigrants within the
European Union and other unions.
• Although the terms of trade are ultimately determined by supply and demand, the
process by which the terms are set is different from that visualized in traditional
trade theory. They are determined partly by administered pricing in oligopolistic
markets.
• Comparative advantage shifts over time as less developed countries become more
developed and realize their latent opportunities. For example, during the past 150
8. International Financial Management. What is different about international
financial management?
Multinational financial management requires an understanding of cultural, historical,
and institutional differences such as those affecting corporate governance. Although
both domestic firms and MNEs are exposed to foreign exchange risks, MNEs alone
face certain unique risks, such as political risks, that are not normally a threat to
domestic operations.
9. Aidan’s Globalization. After reading the chapter’s description of Aidan’s
globalization process, how would you explain the distinctions between international,
multinational, and global companies?
The difference in definitions for these three terms is subjective, with different writers
using different terms at different times. No single definition can be considered
definitive, although as a general matter the following probably reflect general usage.
Multinational is usually taken to mean a company that has operating subsidiaries and
performs a full set of its major operations in a number of countries, i.e., in “many
nations.” “Operations” in this context includes both manufacturing and selling, as
well as other corporate functions, and a multinational company is often presumed to
operate in a greater number of countries than simply an international company. A
multinational company is presumed to operate with each foreign unit “standing on its
own,” although that term does not preclude specialization by country or supplying
parts from one country operation to another.
10. Aidan, the MNE. At what point in the globalization process did Aidan become a
multinational enterprise (MNE)?
Aidan became a multinational enterprise (MNE) when it began to establish foreign
sales and service subsidiaries, followed by creation of manufacturing operations
11. Market Conditions. The decisions of MNEs to move to new markets invariably take
advantage of both market imperfections and market efficiencies. Explain.
When they decide to relocate, MNEs first consider market conditions. At one end of
the spectrum, if the market conditions are favourable, MNEs would find opportunities
in nations that possess cheap inputs, trained or semi-trained affordable labor, large
populations with acceptable purchasing power, etc. At the other end of the spectrum,
the anti-monopoly law allows MNEs to take up a large market share.
12. Why Go. Why do firms become multinational?
1. Entry into new markets, not currently served by the firm, which in turn allow the
firm to grow and possibly to acquire economies of scale.
2. Acquisition of raw materials, not available elsewhere.
13. Investment Motives of Firms. What is the difference between proactive and
defensive investment motives?
Proactive investments aim at enhancing the growth, productivity, and profitability of
the firm. Defensive investments aim at limiting the growth and profitability of
14. Aidan’s Phases. What are the main phases that Aidan passed through as it evolved
into a truly global firm? What are the advantages and disadvantages of each?
a. International trade. Two advantages are finding out if the firms’ products are
desired in the foreign country and learning about the foreign market. Two
disadvantages are lack of control over the final sale and service to final customer
(many exports are to distributors or other types of firms that in turn resell to the
final customer) and the possibility that costs and thus final customer sales prices
will be greater than those of competitors that manufacture locally.
c. Licensing a foreign firm to manufacture and sell. The advantages are that product
costs are based on local costs and that the local licensed firm has the knowledge
and expertise to operate efficiently in the foreign country. The major
disadvantages are that the firm might lose control of valuable proprietary
technology and that the goals of the foreign partner might differ from those of the
home country firm. Two common problems in the latter category are whether the
foreign firm (that is manufacturing the product under license) is a shareholder
wealth or corporate wealth maximizer, which in turn often leads to disagreements
about reinvesting earning to achieve greater future growth versus making larger
current dividends to owners and payments to other stakeholders.
e. Direct ownership of a foreign, incorporated, subsidiary. If fully owned, the
advantage is that the foreign operations may be fully integrated into the global
activities of the parent firm, with products resold to other units in the global
corporate family without questions as to fair transfer prices or too great
specialization. (Example: the Ford transmission factory in Spain is of little use as
a self-standing operation; it depends on its integration into Ford’s European
operations.) The disadvantage is that the firm may come to be identified as a
“foreign exploiter” because politicians find it advantageous to attack foreign–
owned businesses
15. Financial Globalization. Explain the twin agency problems. How do the twin agency
problems limit financial globalization?
problems arise because corporate insiders and the rulers of some nations may pursue
their own interests at the expense of outside investors. When these twin agency
problems escalate, corporate insiders tend to retain substantial equity (either directly